Further to our article in February 2018 , the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Act received royal assent on 29 March 2018. The Act extends the bright-line test from 2 to 5 years.
Who does this legislation apply to?
This legislation applies to ALL vendors who sell their residential property within 5 years (irrelevant of the intention at the time of purchase). For sale and purchase agreements signed after 29 March 2018, this will mean that if a vendor sells within 5 years of owning a residential property, and the property is not their main home, then they will be taxed on any gain made on the sale.
For those sale agreements that are already in place, i.e. signed before 29 March 2018, but settlement is yet to occur, then the previous timeframe applies (i.e. a vendor sells within 2 years of owning a residential property (that is not their main home) then they will be taxed on any gain made on the sale).
Another note to remember is like under the current timeframe, any vendor selling may only use the main home exemption twice within the 5 year period.
What does this mean for you?
The main questions you should be asking your vendor clients straight away should be:
- How long have you owned the property for?
- Is this your main home?
- If taxation is a concern, have you sought advice from your accountant and/or legal advisor?
Once these matters are established, you can alert your vendor about the risk of capital gains tax. During the course of the sale transaction, we will also discuss potential taxation with vendors, but it would be hugely beneficial to our clients if you made them aware of the new legislation and requirements that will be needed. We see this as especially important for you as the date of disposal is the date of the agreement for sale and purchase between the vendor and the purchaser, not the date the property is transferred. Once the agreement is signed within the 5-year time frame, your vendor could be up for a tax they maybe weren’t expecting.
We suggest if your vendor clients are concerned by potential tax implications of a sale, they take accounting and/or legal advice prior to entry into any agreement for sale and purchase. Even where it is not a consideration for a client it is something you should bring to their attention to avoid potential nasty surprises from the Inland Revenue.